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Although the BoJ’s unprecedented monetary stimulus has paid off, history shows that it is harmful to distort the bond market indefinitely. How will the BOJ’s monetary normalization affect the USDJPY? Let us discuss the Forex outlook and make up a trading plan.
Monthly yen fundamental forecast
At his last meeting, Haruhiko Kuroda called the ultra-easy monetary policy he had pursued a success. Yes, inflation failed to anchor at 2%, but Japan forgot about deflation, the number of jobs increased, and the economy revealed its potential. However, not everyone agrees with this opinion. Only 56% of Bloomberg respondents viewed 10 years of unprecedented monetary easing as a success. 44%, on the contrary, believe that Haruhiko Kuroda started successfully, but now, it’s time for changes.
Performance of Haruhiko Kuroda’s policy
Source: Bloomberg.
In March, the Bank of Japan did not begin to make adjustments to monetary policy. It kept the interest rate at -0.1% and 10-year target yield range at +/-0.5%, which was forecast by 46 out of 49 Bloomberg experts. Specialists expect that the new BoJ governor, Kazuo Ueda, will begin to change everything, starting from his second meeting. Normalization is one of the key drivers for the USDJPY downtrend.
History repeats itself. In 1942, the Fed set a 2.5% yield ceiling on 10-year Treasury bonds, which it dropped in 1951. During the pandemic, the Reserve Bank of Australia had a short-term control over three-year bond yield. It all ended in the same way — massive attempts by investors to test the decisiveness of the central banks and the abandonment of previously pursued policies. Ultimately, bond yields must be determined by the market, and imposed restrictions distort the economy.
The Bank of Japan should also abandon its yield curve control policy. It is especially acute amid the highest inflation in ten years and the new BoE chief. Due to the expected changes, the chances for the yen strengthening are rather high. Investors expect the yen to appreciate because of both domestic and foreign factors.
Dynamics of USDJPY risk reversals
Source: Bloomberg.
The greatest three-day drop in US Treasury yields since 1987 and the return to the markets of the idea of the Fed dovish shift amid mixed statistics on the US jobs market and the bankruptcy of the SVB weakened the greenback’s position. Collapses in stock indices and a deterioration in global risk appetite tend to strengthen the US dollar when bond yields rise. When the yields are down, investors demand other safe-haven assets, such as the yen, the franc and gold.
Mitsubishi UFJ Morgan Stanley Securities and RBC Capital Markets predict a return of 10-year Treasury yields to 4% due to the Fed’s measures to support the banking system and acceleration of US inflation in February. However, there is no certainty on this issue.
Monthly USDJPY trading plan
In my opinion, the acceleration of the US CPI looks like the main risk for USDJPY shorts entered on the growth towards 136.7 and 138. On the contrary, the reports on consumer prices and core inflation in line with forecasts or worse will allow further selling of the pair with targets at 132 and 130.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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